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Permian Basin falls victim to higher operating costs Ziff attributes increase to property, severance taxes, higher operating costs Petroleum News
The U.S. Permian Basin, the largest oil-producing region in the onshore Lower 48, is laboring beneath a double whammy of decreasing production and particularly increasing unit operating costs, according to an industry study by Ziff Energy Group, a prominent North American energy consulting firm.
Ziff found that average operating costs for oil fields in the Permian Basin last year increased 32 percent to $6.15 per barrel since last analyzed by the firm in 1999. Average operating costs for natural gas fields during the same period fared even worse, rising 66 percent to nearly 55 cents per thousand cubic feet.
Although the average operating cost among all those included in Ziff’s study was significantly higher, the average costs among the “leading operators” were much lower at $4 per barrel for oil and 35 cents per thousand cubic feet for gas.
The study examined 260 fields operated by 14 participants representing more than half of oil and gas production in the Permian Basin, which covers a vast area of about 115,000 square miles and 54 counties in West Texas and northeast New Mexico.
Six of the basin’s top eight operators were included in the study, as well as seven first-time participants, all independents.
Ziff attributed the increase in production costs largely to property and severance taxes, along with higher labor and operating expenses. “This highlights the challenge of controlling costs in the basin’s declining production environment,” the firm said.
Since the 1920s, more than 4,500 oil pools and roughly 1,000 gas pools have been discovered in the Permian Basin with cumulative production of about 39 billion barrels of oil equivalent. There are an estimated 8.5 billion equivalent barrels of proved and undeveloped reserves remaining, so the region likely will be a major producer for years to come. However, those additional barrels are becoming more difficult to extract, requiring a higher level of investment.
In fact, with Permian Basin production entering its decline 30 years ago, the area has become the most active center of carbon dioxide (CO2) enhanced oil recovery operations in the world with over 50 current projects, according to Ziff.
“Permian operators are industry leaders in handling large volume, low margin oil fields, with the challenges of numerous wells, extremely high water cuts, reservoir pressure maintenance, and capital intensive processing operations,” the firm said. Major realignment of field ownership since 1999 Since its last study in 1999, Ziff also found a major realignment of field ownership in the Permian Basin due to the rise of the “super independent” and “mega-mergers” between major oil companies.
The basin’s current leader is Occidental Petroleum, which produces daily 175,000 barrels of oil and 585 million cubic feet of gas, following Oxy’s $3.6 billion acquisition of Altura in 2000, the former joint venture of Amoco and Shell. Other large players include ChevronTexaco, ExxonMobil, ConocoPhillips, BP and big independent Devon Energy.
Ziff noted that many independents grew in size through both acquisitions and the drill bit, including Pure Resources and Kinder Morgan. But the firm added that some traditional Permian players have reduced their position or are moving out, including Marathon Oil’s announced sale of its heritage Yates field and Anadarko Petroleum’s recent closing of its Midland, Texas, office.
Ziff also found that over the past five years, “there has been an increasing gas production, both at shallow horizons and deeper reservoirs.”
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